Shares in the infant formula marketer fell despite the result and outlook being in line with expectations.
A2 Milk turned in a 22 per cent increase in the first half net profit to $68.5m, despite a sharp decline in the birth rate in the world’s biggest infant formula market - China.
The company said the outlook for 2023 was positive, with low double-digit revenue growth expected.
Earnings before interest, tax, depreciation and amortisation (ebitda) rose by 10.5 per cent to $107.8m and the closely-watched ebitda to sales margin came to 13.8 per cent.
The half-year result was in line with the company’s, and the market’s, expectations - delivering double-digit revenue and earnings growth.
A2 Milk reported total formula sales growth of 18.0 per cent while the market in total fell by 12.5 per cent.
The company said its growth was driven by China label infant formula sales and with record market share of around 5 per cent.
However, the company said the Chinese infant formula market would remain challenging after the birth rate there declined by 10 per cent in 2022.
The company expects its ebitda margin for the year to be similar to that of the 2022 financial year (13.6 per cent).
Shares in the infant formula marketer - at its peak New Zealand’s biggest company by market cap - fell despite the result and outlook being in line with expectations.
By late afternoon, the stock was at $7.18, down 57 cents or 7.35 per cent.
A2 Milk looked to be on to a good thing when so-called pantry filling took hold in China when Covid broke out.
But when the important unofficial “daigou” trade in formula between Australia and the PRC fell through when borders closed, both a2 Milk and its supplier Synlait were left with a mountain of unsold inventory.
Forsyth Barr analyst Matt Montgomerie said it was a solid first half result.
“The recovery-turnaround continues to be solid, and management continues to be very transparent with the market,” he said.
Commenting on the share price drop, Matt Montgomerie said the expectations may have run too high in the lead-up to the result.
“Expectations were maybe slightly higher than what the guidance was from the company,” he said.
“On the conference call, their tone about the medium-term margin profile was more conservative than maybe market expectations are currently,” he said.
Chief executive and managing director David Bortolussi said market conditions had been “particularly challenging”.
“The market is consolidating, as it is all around the world,” he told the Herald.
Bortolussi said the decline in China’s newborns came to 10 per cent in 2022, following on from a similar decline in 2021.
“The flow-on impact of that on the infant formula category is significant, initially with early-stage product but for stage three and four product (for toddlers) as well,” he said.
“If you layer on top of that the question of competitive activity in terms of capacity and brands in the market, it’s a market going through transition,” he said.
He said China’s widespread lockdowns had brought about intense change and disruption.
“But it looks like we are heading back to a period of normality,” he said.
Forsyth Barr’s Matt Montgomerie said the result showed a2 Milk was on the improve.
“The business continues to do a solid job navigating what is still a very difficult backdrop, and it will continue to be a difficult backdrop for the next 12 to 18 months as we continue to cycle through the birth rate decline, etcetera,” he said.
The company said its market share buyback of up to $150m started during the half-year and is now 60.1 per cent complete.
A2 Milk’s balance sheet, with a closing net cash $707.2m, remained strong.
Synlait Milk, a2 Milk’s sole supplier of infant formula, last week gave an update on the new national standards (GB) registration process for a2 Milk’s China label infant milk formula products.
As part of the registration, the Ministry for Primary Industries will commence the audit process of Synlait’s Dunsandel facility on behalf of China’s State Administration for Market Regulation (SAMR) this week.
Successful registration in China is vital for both a2 Milk and Synlait.
“New China label IMF registration process remains on track to be achieved in second half of 2023 subject to SAMR approval,” a2 Milk said today.
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